In many ways, 2010 was the start of a return to normalcy. Interest rates began their slow march back to sustainable levels, non-insured mortgage options returned to the marketplace, and private default insurers re-asserted themselves.

In other ways, 2010 was atypical. The government enacted sweeping new mortgage rules, banks competed far more aggressively, and mortgage rates yo-yo’d back to all-time lows despite widespread predictions otherwise.

Among these developments came five of the year’s top mortgage trends:

1. New Mortgage Guidelines

In an effort to pre-empt excessive borrowing, the government imposed far-reaching new mortgage rules. That made it harder to qualify for a variable-rate mortgage, harder to consolidate debt, harder to get a rental property mortgage, and harder for self-employed homeowners to qualify for high-ratio financing.

Despite moderating home prices and low default-rate projections, some felt April’s rule changes weren’t enough. As 2010 drew to a close, a small contingent called for even more government regulation. (Thus far, the Finance Department hasn’t publicly supported more regulation, so the odds of new rules in 2011 are off the board.)

2. Astonishing Rates

Mortgage rates made historic lows in 2010. Homeowners jumped at 3.29% five-year fixed mortgages and variables below 1.75%.

In turn, rock-bottom rates and extended amortizations stoked home demand (some say over-stoked) with monthly payments as much as 30% below long-term averages for the same mortgage amount.*

Giveaway rates had to end sometime, however. After prime rate held at 2.25% for over 13 months, the long and slow climb to a “normal” policy rate began in June.

3. Banks Stepped Up Their Game

Banks kept up an assault on brokers that began in earnest in 2009.

In 2010, banks fought harder than ever with aggressive discounting. BMO’s Low Rate mortgage and CIBC’s cash-back switch (with its low effective rate) were two very public examples. Behind the scenes, banks armed their internal mortgage sales forces with an ever-greater amount of rate discretion.

The Big 5 also put more bodies on the street, with some swelling their mortgage specialist ranks by 20-30%. Banks even tried to steal a page from broker playbooks by promoting comprehensive mortgage advice.

4. Cross-winds in the Broker Channel

2010 was the first year in many that overall broker market share declined somewhat, ending at about 25%. The industry-wide broker headcount also reportedly fell. Bank and credit union competition and rate-driven mortgage commoditization were two leading causes.

On the other hand, 2010 saw brokers capture the biggest share of new mortgages at 40%. (This is a very positive continuation of a long-term trend.)

5. Changing Nature of Posted Rates

Instead of raising posted and discounted rates simultaneously, banks (led by RBC) deviated from tradition in late 2010. As client rates rose, banks held down posted rates. The banks’ stated objective was to appear more competitive, but the sub-plots were more interesting. Suppressing posted rates had major implications for:

• Qualification rates (making 1-4 year terms and variables easier to get)
• IRD penalties (which, at some lenders, would have decreased if posted rates had risen)
• Cash-back down payment mortgages (which are sold at posted rates and got relatively cheaper)

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This brings us to a not-so-fearless prognostication for 2011.

We have a strong sense that lower volume and easier-to-access rate data will trigger ferocious rate competition in 2011 (but not savage rate competition. Wait until 2012 for that). Banks and credit unions will battle even harder for share, and give their legions of new specialists more ability to compete on rates. Add in a slew of new rate comparison websites and 2011 may be the greatest test yet for mortgage originators.

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Sidebar: For experienced mortgage planners and road reps with big client databases, rate wars are less of a concern, however for newer originators building a referral network, they represent a threat.

Competition need not be unnerving but it should be motivating. Developing an information advantage (i.e. finding creative ways to deliver better advice)…and executing on time-tested and/or unique referral strategies…will help keep you on top of the game.

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* Based on a static loan amount and comparing a 3.50% 5-year fixed with a 35-year amortization versus a 5.15% 5-year fixed with a 25-year amortization. 5.15% is an approximate 10-year average of discounted 5-year fixed rates.

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Rob McLister, CMT